The Oregon Department of Energy ignored its own rules, legislators’ intent and taxpayers’ interests in reaffirming its decision to define Shepherds Flat wind farm as three separate facilities and provide its owners three separate $10 million tax credits. The mammoth installation of turbines in eastern Oregon, developed by a New York company to slake California’s thirst for renewable energy, started spinning last year.
The agency undertook a review in March of its earlier tax credit approvals for the wind farm after an investigation by The Oregonian raised questions about its eligibility for more than one tax credit. Lisa Schwartz, appointed in January as ODOE’s fourth director in five years, signed off on the final two credits last month after what she described as a rigorous review in cooperation with the Department of Justice.
Yet limited and often non-responsive information about the review provided to The Oregonian suggests it was neither rigorous nor consistent with state rules governing tax credits. In its review, ODOE ignored clear evidence in its own files and additional records identified by The Oregonian that should have disqualified $20 million of the $30 million in tax credits. It failed to ask for contracts or other documentation to answer fundamental questions that state rules pose about ownership, financing, construction, operation and maintenance.
Instead, ODOE made assumptions, relied again on statements made by developers before the project was built, and reversed its own analysts’ earlier conclusions. Its review apparently tapped only one new source: a report by ODOE’s own staff for an entirely different purpose and largely irrelevant regarding tax credit eligibility. In the end, ODOE failed to apply its rules on separate and distinct facilities to Shepherds Flat.
“What is clear, without question, is that they have sought how to qualify it, not how to disqualify it,” said Lynn Frank, a former ODOE director hired in 2008 to help write the original rules governing separate and distinct renewable energy projects. “Any reasonable person looking at the project would have denied the application.”
The Legislature tried time and again in the past five years to rein in exploding liabilities and blatant abuses of Oregon’s business energy tax credit program, which launched the richest green energy subsidies in the nation in 2007. Lawmakers first reduced what they saw as unnecessary incentives to lure large wind farms, and eventually killed the program altogether as controversy mounted over its administration. Nonetheless, state taxpayers are stuck with a long hangover of outstanding credits, with only ODOE to protect their interests and make sure applicants meet the letter of the law.
Schwartz claimed her department’s review “uncovered every stone” to determine the three phases of Shepherds Flat were “separate and distinct facilities” under state rules. Yet she was uninformed about specifics, unopen to making staff available for interviews and unwilling to share any information from discussions with the Justice Department.
“You’ll have to take our word for it, that we actually work with our attorneys and staff diligently,” Schwartz said. “I’m not waiving client-attorney privilege.”
The DOJ declined to comment. A spokesman for Gov. John Kitzhaber said he was not consulted about the decision but was satisfied with the results. The wind farm developer, Caithness Energy, has declined The Oregonian’s interview requests for years. Email statements from Caithness have repeatedly said it met Oregon’s requirements for multiple tax credits.
Reaction from key legislators was mixed. Sen. Ginny Burdick, D-Portland, who chairs the Senate Revenue Committee and co-chairs the joint Tax Credits Committee, pushed the Legislature to downsize the incentive program and prevent abuses. She didn’t have the information to assess the Shepherds Flat review but said the lack of transparency and accountability was unacceptable.
“We said very clearly we want these projects to be legitimate. We want Oregonians to know where their money is going, who benefits and why. If that’s not being followed, we have to get answers.”
Burdick’s House counterpart and co-chair of the joint Tax Credits Committee, Rep. Phil Barnhart, D-Eugene, expressed confidence in ODOE’s review of Shepherds Flat.
“I understand that the department found in each case that the credits were issued properly and that they qualified under the sideboards set out by the Legislature,” he said in an email.
State rules specify that if a project meets any three of seven definitions for a single facility, ODOE should approve only one tax credit. Schwartz said she was “confident” that Shepherds Flat’s three phases met only one of the seven criteria. “I wouldn’t sign the credits unless I believed that were true.”
The Oregonian’s review suggests that, conservatively, Shepherds Flat meets four of the state criteria – more than enough to define it as a single facility, disqualify two of the three tax credits and save taxpayers $20 million.
State rules specify that if a project meets any three of seven criteria for a single facility, it will be determined to be a single facility, eligible for only one tax credit. Here are those criteria, what ODOE concluded in its second review of Shepherds Flat and The Oregonian’s assessment:
1. The facilities are on adjacent parcels of land.
The three phases of Shepherds Flat are adjacent and by this measure, a single project.
The Oregonian: Agree.
2. The project has applied for, or has been recognized as, a single facility in a permit or license from a federal, state, county, city or local authority.
The Energy Facility Siting Council, staffed by ODOE, issued three site certificates.
The Oregonian: Yes.
Shepherds Flat originally filed one application to build one wind farm in February 2007. That’s how EFSC recognized and permitted the entire project in July 2008. Likewise, Caithness reached a single interconnection agreement with the Bonneville Power Administration in July 2008, which recognized a single Shepherds Flat project.
ODOE finalized separate and distinct facilities rules to prevent slicing and dicing in June 2008. A year later, Caithness applied to EFSC, which has no involvement in tax credit decisions, to amend its previous agreement, chopping its site certificate in three. A year after that, the U.S. Department of Energy ordered BPA to issue three interconnection agreements. Regardless, Shepherds Flat has applied for licenses and been recognized as a single facility by state and federal authorities.
3. A single construction contract or multiple contracts with one or multiple contractors entered into within a year of each other. Alternately, the project is interdependent in the way it will be owned, financed, constructed, operated or maintained.
“We rely on developer’s submissions,” the agency said, “which show the contracts were to be bid separately and competitively.”
ODOE also found no interdependence in construction because “the three LLC’s paid from three separate accounts.”
The Oregonian: Yes.
There was heavy and essential interdependence in construction. Caithness hired a single balance of plant contractor for the entire job: Blattner Energy. And trade press reports quote Blattner officials bragging about the intricate coordination in planning and construction of Shepherds Flat. They juggled common equipment, common suppliers and common workers, who moved back and forth between the three sites on a daily and even hourly basis due to planned sequencing, weather and seasonal endangered species considerations.
Blattner invoices submitted to ODOE name separate “projects.” But Blattner’s account name on all invoices in ODOE’s file is “Caithness Shepherds Flat Wind Project” with a portfolio name “CSF Construction Account.”
ODOE didn’t apply this rule. It didn’t check contracts, as the rules ask. Its spokeswoman said, “The agency has not made a point of asking people for contracts.”
Caithness’s pledge of competitive bidding – cited by ODOE as proof of separate projects – is immaterial under state rules. But apparently ODOE never verified if it took place anyway.
Caithness registered three limited liability companies – North Hurlburt LLC, South Hurlburt LLC and Horseshoe Bend LLC – with Oregon’s Secretary of State and pays $275 annually to maintain them. Because that paperwork is on file, and those entities applied for tax credits, ODOE says they’re separately owned. Full stop.
ODOE did mention in email that “each of the Oregon LLCs has different ownership profiles.” But it failed to explain what that means.
The Oregonian: Yes.
Each LLC is a pass through entity. And the same state paperwork that ODOE apparently checked lists a single member, or owner, of all three: Caithness Shepherds Flat LLC. That ownership structure is repeated in countless regulatory and financial filings. The $35,000 fee that each LLC paid to ODOE to process separate tax credit applications came in consecutive checks from the same bank account, which belonged to same company, Caithness Shepherds Flat LLC. And analysts for Fitch Rating say Caithness Shepherds Flat LLC is owned by Caithness, GE and three equity investors brought in to harvest tax benefits: Google, Tyr Energy and Sumitomo Corp. of America.
Behind this fan dance, ownership of all three facilities is related and interdependent.
Though the bonds to finance the wind farm were issued together, by Caithness Shepherds Flat LLC, the department says it only dealt with the three Oregon LLCs.
The Oregonian: Yes.
The financing is clearly interdependent. A series of bonds to finance the entire project was issued by one entity: Caithness Shepherds Flat LLC. According to Fitch Ratings, none of the bonds has any connection to a particular phase of the project. And the U.S. Department of Energy issued a single loan guarantee to cover 80 percent of the bonds to Caithness Shepherds Flat LLC.
Each facility has its own site manager, its own operations and maintenance building, and separate contract to sell output to Southern California Edison.
The Oregonian: Yes.
Turbine supplier GE is an equity investor in Shepherds Flat and has a 10-year operations and maintenance agreement with all phases. All the turbines are monitored from New York. The project spreads about 30 miles from the Columbia River south, so it’s impractical to run out of one operations building. Its technicians are assigned to teams at particular sites, but they perform work at all three, according to a contract employee who has since left the job. Operators of the high voltage system also circulate between sites.
4. The facilities have agreements to share project expenses, personnel, or capital investments, including generating equipment or other resources.
“We have no evidence of these types of agreements.”
The Oregonian: Yes.
The newspaper provided a “shared facilities agreement,” to ODOE. The agreement, on file with the Federal Energy Regulatory Commission, outlines how the three LLCs will share ownership and expenses of common equipment. ODOE staff know the agreement exists, as they quoted it in response to queries from The Oregonian.
5. The generating equipment was purchased by the same person or persons who own or operate the facility.
In June 2012, a department analyst concluded yes; all equipment was purchased under the authority of Derrell Grant, general manager of all three facilities.
In its recent review, ODOE changed its mind. “Just because the same general manager was listed as the main point of contact, that does not mean he also purchased all the equipment.” ODOE said CPA letters, “confirm different project payment dates.”
The Oregonian: Maybe.
Financial and regulatory transactions for Shepherd’s Flat in ODOE’s files are all under the authority of a common group of Caithness executives, including Derrell Grant. ODOE said it didn’t request contracts, so it never verified whether the procurement was by the same person, persons or entity.
Procurement for the entire project is clearly related. Caithness initially told ODOE the three phases would buy turbines from three separate suppliers: Siemens, Vestas and GE. Instead, all bought turbines from GE, which announced a single $1.4 billion contract with Caithness in December 2009. “This is the largest contract we signed this year,” a GE executive said at the time.
Once again, ODOE doesn’t answer the question posed by the rules. The payment dates are immaterial.
6. Facilities are connected to the grid through a single connection or multiple connections when there is shared net metering.
The agency’s site inspector confirmed last fall all three facilities share a ring bus and interconnection to the grid. Caithness’s on-site representative apparently acknowledged that, but assured the inspector those were the only points of commonality.
For the current review, ODOE redefined “interconnection to the grid” and drew from a different site inspection this spring by the Energy Facility Siting Council. The report noted three substations at Shepherds Flat. ODOE’s conclusion: “Individual substations on each property are the first step of interconnection. The department’s inquiry ends at the first substation and does not extend to every subsequent substation.”
The Oregonian: Yes.
A substation is not a connection to the grid. Shepherds Flat has a single interconnection to the grid.
Power from all its turbines flows over a transmission line from the North Hurlbert substation to connect with the Federal Columbia River Transmission System at BPA’s Slatt substation. The wind farm’s site certificates outline the design and ODOE’s site inspector last year confirmed it.
7. Other factors or considerations that demonstrate the facility is not separate and distinct based on construction, operation, maintenance and output.
ODOE: “None that we know of; the three projects were constructed as stand-alone facilities with separate O&M buildings and separate substations. Moreover, the output is sold under separate contracts.”
The Oregonian: Yes.
The output was sold in one fell swoop, to one customer, Southern California Edison. In August 2008 SCE signed a 20-year contract for up to 909 megawatts of power from Shepherds Flat with DCE, a subsidiary of Caithness. In a news release, an SCE vice president said, “This contract is a crown jewel in our renewable energy portfolio.”
SCE filed three power purchase agreements with regulators, but told them it was seeking approval of three contracts “relating to a single wind project” in Oregon.
Indeed, Caithness’ own statements refer to Shepherds Flat as “a wind power generation facility” and “the largest wind facility in Oregon.”
June 2006 Lifeline Energy submits notice of intent to build one wind farm, Shepherds Flat.
Feb. 1, 2007 Caithness Shepherds Flat applies to the Energy Facility Siting Council to build a single wind farm.
June 20 Oregon Department of Energy adopts tax credit rules, with specific definitions of a single facility to prevent wind farm developers from slicing up projects for multiple subsidies
July 11 CSF subsidiaries submit preliminary applications for three $10 million tax credits.
July 18 Bonneville Power Administration issues interconnection agreement to one wind farm, Caithness Shepherds Flat.
July 25 Siting council issue certificate for one wind farm, Caithness Shepherds Flat.
August Southern California Edison announces a single, 20-year contract with DCE, a subsidiary of Caithness Energy, to buy all output of Shepherds Flat.
May/June ODOE issues preliminary approval for three $10 million tax credits to CSF subsidiaries based on company statements that ownership, financing procurement, construction, operation, output and maintenance will be separate.
June 15 Applications to amend site certificate to divide CSF into three.
June 27 Legislature passes bill to reduce wind farm subsidies from $10 million to $3.5 million, calling them unnecessary. Gov. Ted Kulongoski vetoes it.
September Siting council grants request to divide CSF certificate in three.
November Under pressure from Legislature to curb tax credit abuses, ODOE finalizes more specific definitions of single facility.
December GE announces a single, $1.4 billion contract from Caithness Energy to supply all turbines to Shepherds Flat, including a 10-year operations and maintenance agreement.
February Legislature phases out tax credits for large wind farms. Kulongoski signs the bill.
September Staff email at U.S. Department of Energy’s loan guarantee office says political pressure to decide Shepherds Flat loan guarantee is “real heavy … due to interest from VP.”
Oct. 25 Cabinet memo cautions President Barack Obama that Shepherds Flat developers are “double dipping” on federal, state and local subsidies. It says developers “have little skin in the game” and “the project would likely move without” the federal loan guarantee.
December U.S. DOE issues loan guarantee to Caithness Shepherds Flat LLC for 80 percent of $1.3 billion in debt to be issued.
December Caithness Shepherds Flat LLC closes on bond financing, covering entire project.
2011 Construction begins
June 1 ODOE analyst concludes Shepherds Flat meets the definition of a single facility under two of seven criteria: on adjacent parcels, all equipment procured by one individual.
Sept. 5 ODOE site inspector notes a common interconnection, a third criteria of a single facility, sufficient to disqualify second and third tax credits.
Nov. 2012 -Jan. 2013 ODOE approves three $10 million tax credits for CSF subsidiaries.
March ODOE says it will re-review second and third tax credits
June ODOE’s review reaffirms second and third$10 million tax credits
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